Projected Dividends 12% Growth Essays Example

I used a Dividend Discount Model (DDM) as I want to find a stock that can give me quarterly income. I also used the assumption that I might know the company and possibly use their product. Lastly, the company has to have a fairly large market cap (Blue Chip) stock. I kept only a few variables in the stock screener which allowed me to find a handful of good stocks but not limit it by having a confounding indicator. My assumption in this case was to find a dividend producing stock that could also growth in Earnings per Share (EPS). For many dividend producing stocks they have to have a decent market cap. In this case I chose >250 million and going onto higher. For the dividend yield I chose any as a starting point and 5% max as an end point. I felt that if I went higher than the max I might get too many companies where I would have to choose between. Also 5% is a decent price for companies to pay to their shareholder rather than reinvesting it. I tried to get a price to earnings number that was low but not too low so I kept this to be 5 at the minimum and 15 at the maximum. Above 20 I could consider this to be overvalued. Lastly, I chose a Est. 5 Yr EPS Growth: of 5% increasing at least. This allowed for both a steady growth and possible no sharp peaks e.g. the company really knows how to operate. Also it allows for changing times e.g. CEO’s, economic climate.
The company I found was American Express (AXP). Not only do I know this company I looked at the EPS and dividend growth over several years (see table below). They had an increasing EPS and an increasing dividend. To determine if this company was undervalued or overvalued I first looked at the P/E and because I chose a relative low P/E (just squeaked by under my parameters at 14.97) I found that it could be undervalued. However, I had to compare this to other similar companies within this space. Mainly I looked at Visa which has a P/E = 30.64 and Mastercard P/E = 29.44. So American Express is a really good company to invest.

Growth Estimate for next 5 years (per annum) is 9.36% (past 5 year growth was 13.68%), Required Growth rate = 8%
Current Stock Price = D1 ÷ (k – g)
Stock Price (2014) = 1.01 / (.12-.08)= 25.25 The observed stock price is $82.35 (2/27/2014)
Stock Price (2019) = 4.734 / (0.0936-0.08)= $348

Where:

D1 = dividend for the coming year}
k = required rate of return; k must be}
greater than g
g = growth rate of dividends
(Decimals and not percentages must be used for the model to work.)

Reference

Yahoo finance. AXP Analyst Estimates. February 27, 2015, <http://finance.yahoo.com/q/ae?s=AXP+Analyst+Estimates>